Marzanna Poniatowicz1, Ryta Dziemianowicz2, Agnieszka Alińska3
LIMITED TAXING POWER OF LOCAL GOVERNMENT ENTITIES IN POLAND
AS A DETERMINANT OF TAX COMPETITION AT THE LOCAL LEVEL
Abstract
The key determinant of revenue financial autonomy of local government is the local taxing power. A
wider range of fiscal autonomy usually translates into a higher degree of financial autonomy of
territorial entities in a given country. At the same time, the wider the range of powers of local
authorities in terms of deciding on tax matters, the greater the probability of occurrence of tax
competition at the local level. The aim of this article is to demonstrate that the scope of local taxing
power of local government entities, unduly restricted in Poland, hinders the implementation of the
local tax competition mechanisms in the sub-national government sector, which in turn prevents the
optimal allocation of public goods provided by territorial communities. The authors of the paper
propose the introduction of specific deregulation solutions and changes enhancing the tax autonomy of
local governments, which in effect would create a more "friendly environment" for tax competition to
function at the local level.
Key words: sub-national government’s revenue and expenditure autonomy, taxing power,
local tax competition
JEL Classification: H71, H72, H77
1. Introduction
The key value of the local government is financial independence (autonomy) of local
government entities. Its scope is different in different countries and results from the
advancement of the decentralization processes, being a derivative of the function performed
by the public authority and the manner and proportions of their distribution between the
central and local government. Financial independence is manifested in two basic aspects, i.e.
revenue and expenditure. The key determinant of independence understood in the revenue
aspect is undoubtedly local taxing power. In the opinion of the authors of this paper, its scope
is too limited in Poland. This is in a way an effect of historical circumstances – for over forty
years Poland was a socialist country, where there was no room for self-government and the
state monopoly was omnipresent in all aspects, including taxation. It was only in 1990, along
with the change of regime, when the first phase of decentralization reform was carried out and
municipalities as local government entities were brought to life (their current number is
2479). In subsequent years, work began on introducing two additional levels of local
government, i.e. poviats (currently there are 314 country districts and 66 townships) and local
government voivodeships (16). In the current state of the law, generally only municipalities
have their own revenue of a tax character. Both poviat and local government voivodeships are
completely devoid of this attribute. It should be emphasized that the scope of local taxing
1
Associate Professor, University of Bialystok, Faculty of Economics and Management, Poland, e-mail:
[email protected]
2
Associate Professor, University of Bialystok, Faculty of Economics and Management, Poland, e-mail:
[email protected]
3
Associate Professor, Warsaw Scholl of Economics, Collegium of Socio-Economics, Poland, e-mail:
[email protected]
1
power of municipalities is to a large extent limited by the state and basically confined to
determining rates of some taxes and fees (within statutory limits set by the state), using tax
allowances (based on statutory rules) and introducing certain tax exemptions (only objective).
The overall picture of excessive reliance of local government revenues in Poland on central
tax decisions is also influenced by the fact that over 21% of the local government revenues in
Poland is revenue from its share in the incomings in state income taxes, i.e. personal income
tax and corporate income tax, and therefore from the category of revenues completely devoid
of the local taxing power component. When analyzing the scope of this power, one should
take into account not only the possibilities of the local government influencing the shape of
tax revenue, but also fiscal efficiency of individual sources of revenues. In this context, the
problem is the low efficiency of the system of property taxation. In Poland, an areal taxing
system functions, in which the tax base is the area, and not the value of the property, as it is in
the cadastral system. Such a solution not only reduces the effectiveness of the tax, but is also
associated with a narrower range of local taxing power.
The aim of this paper is to demonstrate that the scope of local taxing power of local
government entities, unduly restricted in Poland, hinders the implementation of local tax
competition mechanisms, which in turn prevents the optimal allocation of public goods
provided by territorial communities.
2. Financial independence of local government – theoretical connotations
Financial independence is the very essence and core value of local government. The
essence of the idea of financial autonomy of local government entities results from the state's
possibility to share some of the attributes of financial power with other public entities,
including local government entities. Of course, the scope of local government autonomy is
different in different countries and results from the advancement of decentralization of public
administration, being a derivative of the function performed by the public authority and the
manner and proportions of their distribution between the central and local government
[Kornberger–Sokołowska, 2001]. As it is emphasized in the literature, decentralization of
implementation of specific functions attributed to public finances, i.e. the allocative,
redistribution and stabilizing function, is not and cannot be made in equal measure. R.A.
Musgrave assumes that local authorities should be involved in the implementation of the
allocative function to the fullest extent, while implementation of the redistribution and
stabilizing function should be first and foremost linked to the liability of the central
government [Musgrave, 1959].
Financial independence of local government concerns two basic aspects, i.e. revenue and
expenditure. The concept of revenue autonomy should be understood as a specific scope of
decision-making autonomy of local government in the context of possibility of own fiscal
policy in a given area, and thus a certain decision-making power as a part of the so-called
local taxing power associated with legally guaranteed freedom to shape the size and structure
of local taxes and fees by the local authorities. Revenue autonomy understood in this way
requires proper shaping of the system of local government revenue sources by raising its
profile in this system of financial resources given for self-disposal of local government
entities, i.e. so-called own revenues4. Theoretically speaking, the larger the share of own
4
Local taxes and fees are undoubtedly a key source of this category of revenues, but nevertheless other sources
can be identified, e.g. revenues received from property owned by the local government entity. According to
Polish budget reporting, own revenues of local government includes, quite unfortunately, also local government
shares in state income taxes. Firstly, those are shares in the personal income tax (municipalities – 39.34%,
poviats – 10.25%, voivodeships – 1.6%), and secondly, shares in corporate income tax (municipalities – 6.71%,
poviats – 1.4%, voivodeships – 14.75%). Treating them as own revenues is not justified if only because they are
central taxes, in principle excluded from the possibility of application of instruments of local taxing power. As a
result of the described solutions, a kind of an "official blurring"of the actual picture of the level of financial
2
revenues in total revenues, the greater the revenue autonomy of local government. However,
one should agree with the view of E. Korbereger-Sokołowska, that financial independence of
local government understood as a synonym for self-financing, which would mean financial
management model based solely on own revenues, is a kind of utopia. No country has
managed to create such a system of institutional division of public revenue sources, which
would ensure that all local government entities fully cover their expenditures with own
revenues. One of the given reasons is the uneven distribution of public revenue sources with a
relatively even distribution of public tasks and expenditures associated with their
implementation [Kornberger-Sokołowska, 2001]. This imbalance is particularly evident in the
case of Polish local government entities5.
It should also be noted that different regulations in force in particular countries may be
included in the group of fiscal instruments directly influencing the revenue independence of
local government entities, which limits the size of the allowable budget deficit or debt level
[Kosek-Wojnar, 2004] in the local government sub-sector6. They are so-called fiscal rules
that G. Kopits and S.A. Symansky define as a restriction of a quantitative or qualitative
character introduced on a permanent basis, i.e. independent of the changing political and legal
situation, imposed on specific economic values of the public finance sector [Kopits and
Symanski, 1998, p. 2]. These rules may be international, national or local7. It is symptomatic
that in the past few years there has been a significant increase in the number of countries
using fiscal rules, both quantitative and qualitative. To a large extent this is a response to
emerging crisis issues and phenomena in their public finances systems, and such a situation
has an impact on the clearly emerging trends of limiting independence not only of revenue,
but also expenditure (this will be discussed later in this paper) of local government by central
public authorities. It should be added that the tendency of local government to loosen fiscal
discipline is higher when the scope of its financial autonomy is higher, and therefore, among
others, the following trend is observed: the more fiscal power the local government has (both
on the side of revenue and expenditure), that is, the greater the scope of fiscal
independence of local government in Poland takes place. The scale of this problem is significant, because the
share of revenues from this is substantial. For example, in 2012, local government revenues from its share in the
revenues earned within the scope of state income taxes stood at over 35% of the total own revenues earned.
5
According to the data from the Polish Ministry of Finance for 2013, the highest scale of revenue disparities
related to municipalities (revenue disparity between the richest and poorest municipality in Poland was at the
level of 21:1). Much smaller scale of revenue disparities related to poviats (4:1), and the smallest – to
voivodeships (2:1).
6
According to new accounting standards introduced in the European Union – the European System of National
and Regional Accounts ESA 2010, which since September 2014 replaced the previously existing system ESA
95 – basic components of public finances sector in the EU Member States remained unchanged. They are:
central government, often referred to in Poland as the government sector, state government – present only in
federal countries (Poland is a unitary country, so this component is non-existent), local government social
security funds).
7
Convergence criteria from Maastricht may serve as examples of international rules, specifying the maximum
size of the public finances deficit in EU Member States at the level of 3% of GDP and public debt – at the level
of 60% of GDP. While as Polish examples of national fiscal rules, the following can be cited: the public debt
limit arising from Art. 216 sec. 5 of the Constitution of the Republic of Poland, set at the level of 3/5 of the
annual GDP or also the so-called prudence limits arising from Art. 86 of the Public Finance Act, obliging
government and local government authorities to take specific and diverse recovery actions in situations of
exceeding certain levels of relations of the state public debt in relation to the GDP, i.e. so-called prudence limits
55% and 60% GDP. In contrast, an example of local fiscal rules are new, individual for each entity debt
indicators, so-called Individual Debt Indicators - IWZ (Art. 243 of the Public Finance Act) effective for Polish
local government entities since 2014. They are calculated based on the size of the operational surplus achieved
by a given entity (in Polish conditions: the municipality, poviat or voivodeship) for the last three years preceding
the given financial year, in which debt obligations will be incurred. In accordance with these regulations, the
ratio of debt servicing costs in a given year to revenues in the same year cannot exceed the average operational
surplus calculated for the three previous years (plus revenues from the sale of assets).
3
decentralization, the more central authorities try to restrict actions of local authorities through
various rules and fiscal principles [Report, 2012].
As previously mentioned, the fiscal rules do not only apply to the revenue aspect of
financial autonomy of a local government, but also the expenditure aspect (example:
expenditure rules). Expenditure autonomy of a local government can be understood as a
specific scope of its decision-making freedom in the context of the size and structure of
incurred public expenditure. As P. Swianiewicz rightly observes, even the most significant
financial autonomy on the revenue side may not be greatly significant in a situation when a
local government does not have the freedom to make decisions concerning its expenditures
[Swianiewicz, 2011]. There are many forms of limiting revenue autonomy. One of the most
tangible and direct is increasing the share of revenues transferred from the central budget in
the system of local finances. To some extent, it is known that the greater the share of these
funds in local budgets, the greater the scope of "financial nationalization" of a local
government8. In Polish conditions, this particularly concerns restricted grants, which are a
form of transferred revenues primarily for financing tasks assigned to the local government by
the government. To perform them, the local government receives specific resources, which
must be spent only for the specific purpose and in a strictly defined manner. The decisionmaking powers of a local government in this scope are very limited, and it is generally
difficult to talk about any financial independence. A little wider scope of this independence
concerns a different form of transferred revenue, which is general subsidy. In Poland, it is
crucial for the financing of educational tasks of the local government and for mechanisms of
levelling the revenues of local government entities.
Another, indirect form of limiting expenditure autonomy, unfortunately very popular in
Poland recently, is increasing the scope of tasks of local government without adequate
compensation on the revenue side. As a result of these changes there is a systematic increase
in current expenditures and, consequently, often financial destabilization. In Poland, this
problem primarily concerns financial systems of the largest cities, and the crisis lasting from
2008 has clearly escalated it. Incidentally, it should be added that such practices are not only
inconsistent with the postulate of adequacy of the local government's financial resources with
the implemented tasks contained in the European Charter of Local Government (Art. 9 sec. 2:
"The financial resources of local communities should be proportional to the powers provided
by the Constitution or the law") [Europejska Karta, 1994], but also with the provisions of the
Polish Constitution (Art. 167 sec. 4: "Changes in the scope of tasks and competences of local
government entities take place together with the corresponding changes in the share of public
revenues") [Konstytucja, 1997].
The diverse range of financial autonomy of local government in particular countries is
always the effect/result of the decentralization processes carried out in them, understood as
processes of transferring political, administrative and fiscal powers by the central authority
onto local government entities. The theory of fiscal federalism, among others, refers to these
issues, which focuses on finding the optimal scope/degree of decentralization and the
distribution of economic functions in a country in the form of multilevel public finances
(government, federal and local) in the context of increasing the effectiveness and efficiency of
the public sector and the optimal allocation of public goods. The precursors of this concept
are considered to be Ch.M. Tiebout [Tiebout, 1956] and R.A. Musgrave [Musgrave, 1959].
8
According to the data of the Polish Ministry of Finance, the share of grants and subsidies, and so resources
restricting the scope of financial autonomy of the local government is steadily growing and currently exceeds
already 50% of total revenues. If, in addition, we treat the aforementioned local government shares as transferred
revenues from state income taxes (PIT and CIT), which can hardly be considered a component of own revenue
due to the lack of a local attribute of taxing power, then in this case, transferred revenues from the central budget
account for over 71% of total local government revenues (data for 2013).
4
Whereas the modern development of this theory in terms of local finances was done by W.E.
Oates [Oates, 1998]. Many authors studying these issues believe that decentralization and the
associated greater financial autonomy, including in particular tax autonomy of local
government authorities not only contribute to greater efficiency in the allocation of public
goods, but also have a positive impact on economic development [Ebel and Yilmaz, 2002;
Meloche and Vaillancourt and Yilmaz, 2004; Akai and Nishimura and Sakata, 2007].
3. Methods for measuring the financial autonomy of sub-national government
sector
The previously described dependencies motivate economists to seek ways to measure, and
thus ways to compare diverse scopes of financial autonomy of the sub-national government
(SNG) sector in particular countries [Stegarescu, 2005; Oulasvirta and Turala, 2009].
Literature emphasizes that comparative analysis in this area is not possible with the use of a
single, universal indicator, and usually it is necessary to refer to many different elements
referring to the two main dimensions of overall financial autonomy, i.e. revenue and
expenditure [Swianiewicz, 2011]. For this purpose, S. Swianiewicz recommends using a kind
of "ladder of financial autonomy", based on the assumption of gradability of this autonomy in
four basic aspects. Three of the mentioned aspects relate to the dimension of revenue and they
are:
1) local taxes (the widest scope of financial autonomy – the local government
independently chooses local tax from a broad set of options acceptable in a given
country, and independently determines the rate, allowances and other elements of the
tax structure; the narrowest scope of financial autonomy – both the rate of local tax and
acceptable allowances are determined at the central level)9;
2) transfers (the widest scope of financial autonomy – the local government receives
general subsidy, based on a stable and transparent algorithm; the narrowest scope of
financial autonomy – the local government receives restricted grant with a detailed
method of using it);
3) debt (the widest scope of financial autonomy – lack of formal-legal restrictions/limits
concerning the debt of the local government, and the possibility of using debt
instruments by local government entities are determined solely by market conditions;
the narrowest scope of financial autonomy – the local government is deprived of the
possibility of borrowing).
According to P. Swianiewicz, it is significantly more difficult to formulate an analogous
"ladder" consisting of hierarchically arranged rungs in the case of financial autonomy on the
expenditure side. In this case, the author mentions only a few methods of limiting this
autonomy (norms and standards for local public services, which the local authorities must
comply with; regulations concerning the salaries of employees of the local government subsector; regulations concerning the employment and dismissal of employees of this sub-sector;
regulations concerning the assignment of public tasks to the local government by the central
administration).
In a similar convention, based on the concept of measuring the varying degree of local
financial autonomy, including the dimension of revenue and expenditure, remain the
proposals of other authors, including the concept of the financial autonomy matrix of L.
Oulasvirta and M. Turala (see Figure 1) and the concept of J.T. Dickovick (see Figure 2).
9
More on this topic - later in the article.
5
Figure 1: The matrix of financial autonomy
Source: [Oulasvirta and Turala, 2009].
Table 1: Sub-national revenue and expenditure autonomy: Ideal type measures
Score
High
Revenue automomy
Large amount; constitutionally mandated
transfers; Constitutional guarantees for
major tax bases; Ad hoc transfers
consistently large
Expenditure autonomy
Little central government quidance on spending;
Extensive freedom to transfer funding across
sectors; Black grants, little or no earmarking
Moderate
Large amount; legally mandated transfers;
Legal guarantees for major tax bases
(income tax, VAT, e.g.); Ad hoc transfers
inconsistent or occasional
Central government monitoring; Spending
autonomy for large sources of revenue;
Earmarking for some/minor sources of tax
revenue;
Low
Small amounts of legally mandated
transfers; Legal guarantees for minor tax
authority (fees, , e.g.); Ad hoc transfers
minimal
Spending autonomy for small sources of
revenue; Earmarking used for most/large sources
of revenue; Binding norms and standards set by
center
Very Low
Exlusively voluntary transfers, or no
transfers; Subordination to center on
taxation matters; Ad hoc transfers minimal
Budgets only applicable in given sector or
detailed line item; Spending determined by
national formula; Deconcentration, budget
execution without decision making; Unspent
budgets revert to central government; Binding
mandates (funded or unfunded)
Source: [Dickovick, 2011].
4. Taxing power as the key indicator of the level of financial autonomy of local
government entities
Financial decentralization (or the decentralization of public finances) means the transfer of
appropriate public financial resources and power for their administration to local government
entities [Ruśkowski and Salachna, 2007]. Its essence is primarily the previously described
6
revenue autonomy allowing to finance goods and services at the local or regional level
[Bukowska, 2008]. In the opinion of E. Ruśkowski, the concept of the decentralization of
public finances, however, should not be equated with the financial autonomy of local
government entities. He believes that "the decentralization of public finances concerns public
resources and the rights and obligations in the scope of their development and use, as well as
the organization and management of local government entities' financial economy, while
financial independence (autonomy) of local government entities primarily deals with
privileges (freedoms) of these entities in the formation of revenue and expenditure amounts,
as well as in the organization and management of their financial economy. This means that
the concept of decentralization of public finances is broader, with the concept of financial
independence (autonomy) of local government is a component of this concept. These
categories most frequently interact with each other in such a way that the decentralization of
public finances can be increased without increasing financial independence (autonomy) of a
local government, and the increase of the latter usually means, although not automatically,
the increase of decentralization of public finances" [Ruśkowski, 2006]. Therefore, the
financial autonomy of local government entities is directly linked with taxing power. In
addition to the transfer of revenues and power to manage them, in this case it is necessary also
to provide powers to their development, especially the development of taxes constituting own
revenues of local government entities.
The general principles of the division of taxes between central and local authorities have
been presented in literature on fiscal federalism and locality. According to these principles,
the following criteria of this division are assumed [Bukowska, 2008]:
– the effectiveness of tax administration - the level of power, which has the best
information on the tax base, should be responsible for imposing the given tax;
– fiscal needs - tax revenues should be closely linked to needs and assigned to the level
of power, which is responsible for the realization of specific services related to the
given tax.
However, assigning competences in the scope of determining taxes to various levels of
authorities is not an easy task. The distribution of taxes, according to the principles outlined
above, should be strictly dependent on the scope of the functions assigned to the different
levels of authority; however, increasing responsibility of local authorities is not always
accompanied by higher authorities resigning from certain tax revenue resources. The most
efficient taxes are often only available to the central government, which often makes financial
autonomy of local government entities impossible (Table 2).
Table 2: The traditional model of tax assignment
Type of tax
Corporate income taxes
Personal income taxes
Capital gains tax
VAT
Excise tax
Property tax
Land tax
Recurrent tax
Capital transfer tax
Environmental tax
Tax rate
C
C
C
C
C
R, L
R, L
C, R, L
C, R
R, L
Tax base
C
C
C
C
C
R, L
R, L
C, R, L
C,R
R, L
Administration
C
C
C
C
C
R, L
R, L
C, R, L
C, R
R, L
Levels of Government : C- central; R – regional; L – local
Source: [Bukowska, 2008].
7
The scope of powers of specific government authorities for imposing or modelling taxes,
depending on the functioning institutional system, can be very diverse. OECD distinguishes
five levels of tax autonomy (taxing power) at the local level [OECD, 2014]:
– full powers for establishing tax rates and tax bases (also through the formation of tax
allowances),
– powers to establish tax rates,
– power to determine the tax base (also through the formation of tax allowances),
– in the scope of distribution of taxes,
– lack of influence on determining tax rates and bases.
In practice, tax autonomy of local government entities can also be very diverse (Table 3).
Table 3: Classification of local taxes by degree of local autonomy
High Revenue Autonomy
SNG sets tax rate and base
SNG sets tax rate only
SNG sets tax rate, but only within
centrally permissible ranges
Tax sharing whereby central/local
revenue split can be only changed
with consent of SNG
No Local Autonomy
Highest degree of own -source revenues.
Most often pertains to fees and charges
Necessary and sufficient condition for
categorization as “own revenue”
(piggybacking, tax base
harmonization/conformity permitted)
A typical practice is to cap the top rate
Can result when a local authority collects
the tax and remits to the center
Revenue sharing with share
determined unilaterally by central
authority
100% control by center; this category is a
source of much misspecification of what is
a central vs. local revenue (GFS includes
this category as a local tax)
Central government sets rate and
base of “SNG revenue”
May accompany political decentralization
Source: [Bell and Ebel, 2010].
As it is clear from the data presented in the table, full autonomy, which refers to the total
financial decentralization in terms of own revenues, is extremely rare and rather affects fees
than taxes. Total tax autonomy would occur if the local authorities could determine tax rates
and the tax base for all taxes constituting own revenues. In contrast, usually the local taxing
power is limited and concerns only a small group of taxes. On the other hand, in a situation
where local authorities have no power to establish the tax base and tax rates – tax autonomy
does not exist, although we may also be dealing with political decentralization.
5. The problem of limited local taxing power of local government in Poland
The presented circumstances show that the key determinant of financial revenue
independence (autonomy) of local government is the local taxing power. The dependence is
clear and simple: greater scope of the mentioned power or in other words fiscal autonomy
usually translates into a higher degree of financial autonomy of local government in a given
country. In the context of the undertaken research issue there appears another dependency,
namely: the greater the scope of powers of local authorities in terms of deciding on tax issues,
the more likely the emergence of tax competition at the local level (it will be discussed later in
the paper).
Revenue system of local government in Poland is characterized by poor fiscal performance
of local taxes, depriving of local taxes the two over-community levels of local
government(i.e. counties and voivodeships) and a high participation in the system of
8
financing transfer type revenues. Table 4 shows the structure of budget revenues of various
levels of local government in Poland considering certain categories of revenue type.
Table 4: Structure of local governments revenues in Poland in year: 2003 and 2004 and
2012-2013 ( %)
Including:
Details
POLAND
-Municipalities
- Warsaw City
- cities on the
rights of poviats
- Poviats
- Voivodeships
Years*
2003
2004
2012
2013
2003
2004
2012
2013
2003
2004
2012
2013
2003
2004
2012
2013
2003
2004
2012
2013
2003
2004
2012
2013
Total
own
revenues
43.5
51.5
49.1
50.0
47.3
48.2
46.6
48.2
73.0
81.2
74.2
77.9
52.7
60.3
57.9
58.7
11.3
24.9
29.4
29.9
15.9
59.1
43.0
39.1
Shares in
income taxes
(PIT & CIT)
13.0
21.9
21.2
21.1
11.7
14.6
16.4
16.9
30.7
41.8
34.0
33.9
17.2
24.7
24.0
23.6
1.3
11.1
15.5
15.9
12.0
55.9
35.4
31.7
Revenues
from tax
and local
fees
17.6
16.5
13.0
13.3
23.3
22.5
18.4
19.1
21.0
18.6
12.0
13.1
20.0
19.0
14.7
14.6
X
X
X
X
X
X
X
X
Incomes
from
assets
4.2
4.2
3.8
3.8
4.2
4.1
3.4
3.4
4.1
3.8
7.8
7.0
6.4
6.5
5.4
5.5
1.6
1.8
1.4
1.5
1.1
0.8
1.3
1.0
Specific
grants
General
subsidies
16.4
14.3
22.4
22.0
10.5
12.5
22.0
20.9
7.7
6.6
14.0
10.2
12.6
12.0
18.0
18.0
32.6
24.3
25.3
25.6
51.0
22.4
40.6
44.5
40.1
34.2
28.6
27.9
42.2
39.3
31.4
31.1
19.3
12.3
11.8
11.9
34.7
27.7
24.1
23.3
56.1
50.8
45.4
44.5
33.1
18.5
16.4
16.4
* Selection of years in table is connected with the fact that since 2004, Poland began a new system of local
revenues, reducing subsidies and increasing shares of income taxes and significantly changing subventions for
local government from the State budget.
Source: The Ministry of Finance.
The data presented shows that according to official statistics (presenting shares of local
government incomes considered as own income in State income taxes) shares of transfer
incomes in total incomes is app. 50 %. However, if the shares in the state tax would be treated
according to the theory of fiscal federalism as incomes of transfer type, so in that situation
index of transfer incomes related to total incomes of the whole sector of local government
increases above the level of 70 % ( data relevant to year 2013). The system of revenue based
on a wide range on incomes not shaped directly by local government, makes the breakdown
of relation between local charges and optimal range of local goods and local public services,
thereby impeding implementation of the mechanisms of the local tax competition.
9
In accordance with Art. 217 of the Polish Constitution [Konstytucja,1997], imposing taxes,
other public levies, determining entities, subjects of taxing and tax rates, as well as the
principles for granting allowances and remissions, as well as categories of entities exempt
from taxes takes place by law. Whereas according to Art. 168 of the Constitution, local
government entities have the right to determine the amount of tax and local fees in the scope
specified in the act. Therefore, these provisions define the limits of local taxing power of the
municipality, not giving its full power in the scope of taxes and local fees, and consequently
the legislature, and not the local government decides on the key structural elements of local
government taxes. "In other words, Art. 168 deprives the local government real impact on the
shape of the tax system, because abolishing and introducing benefits comprising it, in
accordance with art. 84 of the Constitution, is reserved as the exclusive privilege of
parliament" [Dowgier, 2007]. Therefore, these powers do not apply to the introduction of new
levies that may be imposed only in statutory mode, as well as forming these tax elements,
which must arise directly from the law regulating the given tax. Consequently, the limits of
taxing power in Poland is established by the tax law, which finds its justification in Art. 217
of the Constitution, according to which the only acceptable form of taxation, determining
entities, subjects to tax, as well as tax rates and scope of tax allowances is legislation form.
Hence local government in Poland only has the right to use specific elements of tax
techniques, clearly indicated in the laws and to the permitted extent [Dolnicki, 2012]. This
right, according to applicable provisions, concerns only certain local taxes (Table 5).
Table 5: Taxing power of municipalities in the scope of developing taxes belonging to the
local category in Poland
Taxing power in the scope of
Type of tax
imposition or
abolishment of
taxes
using
allowances
using exemptions
limited, only within
legally set limits
limited, only within
legally set limits
limited, only within
legally set limits
limited, only within
legally set limits
limited, only
objective
limited, only
objective
none
none
none
none
none
none
none
none
none
none
none
none
Real property tax
none
Agricultural tax
none
Forest tax
none
Tax on means of
transport
Tax on civil law
transactions
Inheritance and
donations tax
Sole proprietorship tax
– fixed amount tax
determining tax
rates
none
none
none
limited, only
objective
limited, only
objective
limited, only
objective
limited, only
objective
Source: own development.
In the current state of the law in Poland, only municipality has their own revenues of a tax
character. This means that the taxing power is the domain of only municipal councils and
does not apply to bodies of other local government entities (poviat councils, voivodeship
parliaments). As a result, one of the demands contained in the aforementioned European
Charter of Local Self-Government (EKSL), according to which at least part of the funds at the
disposal of the local government should come from local taxes and fees (Article 9 par. 3)
[Europejska Karta, 1994], is applicable only in respect of municipalities. In literature it is
10
emphasized that depriving poviats and voivodeships of "own" taxes is not only inconsistent
with the provisions of EKSL, but also in breach of Art. 168 of the Polish Constitution,
according to which local government units (all of them, not just municipalities) have the right
to determine the rate of local taxes and fees [Konstytucja, 1997]. A suspected reason for this
state of affairs is the appointment of a single-level (only municipal) structure of local
government in 1990, and thus dividing taxes into state and municipal, and consequently the
lack of taxes in the tax system (at the time of appointing poviats and voivodeship, i.e. in
1998), which could be granted to these entities. As a result, poviats and voivodeships do not
have "own" tax revenues aside from shares in national tax revenues, i.e. personal income tax
(PIT) and corporate income tax (CIT). As already mentioned, Polish local government can do
little to increase the efficiency of the fiscal capacity of these revenue sources, for instance in
the context that this country (specifically the parliament) establishes key elements of the legal
structure of income taxes. The circumstances described practically make it impossible for
poviats and voivodeships to use instruments of local tax competition (more on this subject later in the paper).
Therefore, Art. 168 of the Constitution guarantees only a minimum scope of tax powers of
local governments in Poland. As a consequence of such legislation solutions, the scope of
local taxing power of municipalities is limited to determining the rates of some taxes and fees
(within statutory limits), using tax allowances (based on statutory rules) and introducing
certain tax exemptions (only objective). The only possibility granted directly to municipalities
regarding the imposition of tax levies on its inhabitants is associated with the category of selftaxation of inhabitants for public purposes (this applies only to natural persons), however, the
condition for introducing this tax burden is the acceptance of the local community expressed
in a referendum10. However, it should be emphasized that according to Polish law, selftaxation does not have all the attributes of tax. Tax is primarily an obligatory provision,
unilaterally imposed by the state or other public-legal entity, and has a general character. In
the case of self-taxation, it is difficult to speak of coercion and unilateral act of imposing it.
Another problem is the nature of this provision, all the more that self-taxation concerns the
collection of revenues by a given municipality for a specific purpose.
It is also worth mentioning here three other relevant circumstances, limiting local tax
autonomy. Firstly, they are limited powers of local tax authorities – only part of the local
government taxes is carried out by the municipal tax authorities, i.e. the village mayor in rural
municipalities, the mayor in small towns and the president of a city – in large urban entities
(e.g. real property tax, agricultural tax, forest tax, tax on means of transport); a significant part
of local government tax revenues, for completely unjustified reasons, remains the
responsibility of state tax authorities, or heads of tax offices (this concerns e.g. tax on civil
law transactions, inheritance and donations tax, sole proprietorship tax paid in the form of a
fixed amount tax).
Secondly, it is an anachronistic system of property taxation, having its origins in the
socialist system which existed in Poland until 1989. The tax sources associated with it (i.e.
real property tax, agricultural tax and forest tax) fully supply municipality budgets. The
natural consequence of the fact that it is an areal system (in which the tax base is area, and not
property value, as it is in the cadastral system) is without a doubt its smaller fiscal capacity,
and thus a narrower scope of local taxing power.
Thirdly, the limited scope of local taxing power is significantly affected by the
dysfunctional system of fiscal equalization in force in the Polish finance system of the sub-
10
A local referendum in Poland is valid if at least 30% of the inhabitants of a municipality eligible to vote
participated and at the same time at least 2/3 of inhabitants eligible to vote cast valid votes for such an option.
11
national government sector. This mainly concerns horizontal equalization11, based on the
mechanism of making solidarity payments (the scope of this solidarity is obligatorily
determined by the state) by entities with a high tax yield for entities with a lower yield. Polish
municipalities have been making such payments for eighteen years, while poviats and
voivodeships – for ten years. And although there is no basis for the total negation of the
existence of equalization mechanisms, then it should be noted that in Polish conditions they
were somehow "wrongly balanced", as a result creating a system excessively limiting rights
to the revenues of payers and rights to independently decide on the manner and directions of
spending money for implementing own tasks, and thus a system not entirely compatible with
the principle of local financial autonomy at the basis of the concept of fiscal federalism 12. The
consequence of this state of affairs is the clear weakening of the stimulative nature of own
revenues of local government, including tax revenues, as well as reducing the motivation of
local government authorities to work towards increasing the fiscal capacity of local sources of
tax revenues (why do it, if any surplus must be transferred to poorer local entities).
To conclude the digressions concerning the scope of local taxing power in Poland, it is
worth looking at the data enabling to compare taxing power (tax autonomy) of the Polish subnational government sector compared to other countries. The statistical data presented refer
to the share of tax revenues of this sector in relation to total tax revenues in selected OECD
countries (Figure 2) and rank the Polish local government as an entity with a medium level of
autonomy. Whereas comparative analysis of the structure of tax revenues at the local level
(Figure 3) clearly indicates the dominant decision-making power in Poland of the central
government (CG) sector in this regard.
Figure 2: Taxing power (tax autonomy) of sub-national government (SNG) varies widely
across the OECD in 2011 (as % of total tax revenue)
40,0
35.7
35,0
30,0
23.2
25,0
20,0
26.6 26.7
15.9 16.3
15,0
9.6
10,0
5,0
25.2
1.1 1.2
4.2 4.8
2.9 3.2 3.6 3.7
10.9
13.1
12.1 12.5
6.5 6.6
Sweden
Denmark
Iceland
Japan
Finland
Korea
United States
France
Poland
Norway
Slovenia
Spain
Portugal
Hungary
United Kingdom
Italy
Greece
Netherlands
Austria
Slovak Republic
Czech Republic
Mexico
0,0
Source: [Taxing power, 2014]
11
In Poland, this mechanism is called "mechanizm janosikowy" (in other countries it is the equivalent of the
"Robin Hood" Tax).
12
This was confirmed, among others, by the Decision of the Constitutional Tribunal of 4 March 2014, as a result
of which non-compliance of regulations in this scope with the Polish Constitution were found, and it was
stressed that such a system unduly limits the possibility of implementing own tasks by the local government.
12
Figure 3: Taxing power (tax autonomy) structure at the local level in 2011 (as % of
tax revenue)
United States
United Kingdom
Sweden
Spain
Slovenia
Slovak Republic
Portugal
Poland
Norway
Netherlands
Mexico
Korea
Japan
Italy
Ireland
Hungary
Greece
France
Finland
Denmark
Czech Republic
Austria
discretion on rates
and reliefs
discretion on rates
tax sharing
arrangements
rates and reliefs set
by CG
others
none of above
0%
20%
40%
60%
80%
100%
Source: [Taxing power, 2014].
6. Taxing power and tax competition at the local level
The problem of local taxing power is in a particular way linked with local tax competition,
a term which should be understood as a kind of rivalry between many local government
entities, the subject of which is to provide access to public tax cash resources mainly deriving
from obligatory collections. The intensity of this competition depends on the ability of local
government authorities to stop the source of fiscal revenues in the territory remaining in the
tax jurisdiction of a given territorial entity [Walasiak, 2014].
Scientific discussion on local government tax competition was initiated in the 1950s by the
formerly mentioned American economist Ch. M. Tiebout. The theory he proposed is called
Tiebout's model/hypothesis [Tiebout, 1956, pp. 416-424]. According to its assumptions,
different local entities providing diverse local public goods compete with each other, like
companies producing private goods on the market. In the opinion of the cited author, such
competition leads to the optimization of both the size and structure of public goods provided.
Just like on private markets, on the market of local public goods, there is a possibility to
choose the supplier (shopping). Residents, in search of an optimal ratio of quantity and quality
of local public goods to their paid taxes, make a choice of the optimal territorial community
for them. In the same way somewhat by foot voting, they may decide to move to another local
government community that best suits their preferences13. Simultaneous emigration of many
13
Tiebout's model has many themes common with the theory of rational choice, otherwise the Public Choice
Theory, which was established in the second half of the twentieth century. Crucial for its development were the
works of A. Downs, J.M. Buchanan and G. Tullock. Their authors assumed that the driving force of private and
public decisions and actions is own, individual interest of citizens and officials. These entities maximize
individual benefits and minimize individual costs, and thus in their actions they are based on individual’s utility
function. Citizen – a consumer, guided by self-interest and seeking to maximize utility, is interested only in such
public goods and services that allow him to achieve these objectives. In contrast, "producers" of public goods
13
people (especially the wealthier) means a real threat for local authorities of losing own tax
revenues, and this motivates local government decision-makers to provide more public goods
of a better quality. Therefore, Tiebout's model assumes that when there are multiple mobile
citizens-consumers and many places with different standards of local public goods, then
consumers will settle in those local government units, which have their optimal combination
of these goods in relation to the taxes paid. Wealthier consumers who wish to receive more
public goods in return for higher taxes will choose the local communities where their
expectations are met, while poorer consumers, by accepting a smaller amount and a lower
quality of public goods and a lower level of tax burdens will choose other local government
communities. In this way, the mechanism of "foot voting" leads to differentiation of local
communities. Even so, according to Tiebout, this is a positive mechanism, because it not only
allows to disclose consumer/voter preferences in a democratic system, but also enables to
create a competitive market for public services. At the same time, this mechanism is an
argument for those public goods that can be supplied competitively to be delivered by the
local level, rather than the central one. In the case of some public goods, there is no choice of
a supplier (example: national defence), in which case Tiebout recommends their provision by
the central level.
Tiebout's model concerning the issues of local tax competition and the optimal allocation
of public goods provided by local communities has been widely developed in a number of
scientific studies in the field of public economics, among others, including in the works of
authors such as: G. Z. Zodrow [Zodrow, 1983], P. Mieszkowski [Mieszkowski and Zodrow,
1989], W. A. Fischel [Fischel, 2006] and S.H. Lee [Lee, 2009]. Many of the cited authors
have indicated specific weaknesses of Tiebout's model, among others, connected with:
limited mobility of citizens of local government communities (in the context of
globalization this mobility to a lesser extent depends on the level of local public goods,
and the dissatisfaction of the consumer-taxpayer only due to the too low/high level of
supply of one or multiple public goods is usually not a sufficient incentive to change
their place of residence);
limited knowledge of citizens about public goods;
inability to provide certain public goods in small local government units (e.g. it is not
worth building schools, theatres, cinemas, swimming pools, etc. for them).
not taking into account so-called spillovers14 occurring between local communities.
There are a number of positive effects of local tax competition. Characteristically, in his
theory, Tiebout clearly glorified them, basically ignoring the negative effects. He emphasized,
among other things, that local tax competition leads to more efficient use of public resources,
and better alignment of local policies for the distribution of local public goods and services to
the preferences of the residents. The specific risks associated with this phenomenon were
mainly pointed out by W.E. Oates, listing among them the tendency occurring in local
government authorities to under-value budget revenues (the term "race to the bottom"
appears) [Oates, 1972]. As a result, a serious problem may appear of insufficient supply of
and services competing amongst each other, guided by their own interests (in the case of politicians this is being
re-elected, while in the case of officials – climbing up the career ladder), try to respond as effectively as possible
to consumer demand.
14
In the economic doctrine the external effect means a side effect (cost or benefit) having an impact on the party
which did not participate deciding on an action which caused this effect. In the case of local government units,
these effects are associated with "spillovers" of production and consumption of certain public goods, which
means that these goods are not always used by only those consumers who pay local taxes. Connected with this,
among others, is the so-called free rider problem in local government communities, i.e. the problem of avoiding
payment for the use of public goods in a different local government unit than the taxpayer's place of residence.
14
local public goods and services, while in the long run – deepening of the level of diversity in
socio-economic development of individual areas.
Literature on the subject pays much attention to the issues of factors/determinants affecting
local tax competition. For example, B.L. Benson identifies these factors using the following
model of fiscal action sequence: 1) social pressure on the increase of public spending, 2) an
increase in tax revenues, 3) an increase in the tax rate within the tax jurisdiction, 3) outflow of
the local tax base, 4) increased competition among local government units with a limited and
mobile tax base [Benson, 2001].
Based on this model, another author, A. Walasiak, distinguishes three categories of factors
affecting the intensity of tax competition, i.e. economic, fiscal and demographic factors. In
this context, discrepancy between expenditure recognized as reference, i.e. expenditures to
which a given local community aspires is essential15, as well as revenues actually realized.
"Competitive tension" in a given local government entity, and thus a tendency for competition
increases along with the growing deviation of the actual level of expenditure in relation to
reference expenditure, and is the result of a mismatch of tax revenue sources to the level of
expenditure. In the opinion of the cited author, in a situation when "poorer" entities catch up
with "richer" ones, the importance of the imperative of local tax competition decreases. On
the other hand, when "richer" entities somehow "flee" from "poorer" entities and
differentiation in this area deepens, then one should expect an increase in the intensity of local
tax competition. In addition, the said intensity is in a direct proportional way influenced by
demographic factors. This intensity typically increases together with the number of
inhabitants of a local government entity [Walasiak, 2014].
The studies conducted by the authors of this paper suggest that local tax competition in
Poland has a very limited scale. This is mainly due to the fact of the small range of local taxes
and the freedom to determine them left to local government authorities. What is symptomatic,
the said freedom in a very limited way concerns only municipalities, while it does not occur at
all in relation to other types of Polish local government entities, i.e. poviats and voivodeships.
The limited impact of tax competition at the local level is also confirmed by the results of
empirical studies carried out in 2014 by P. Swianiewicz and J. Łukomska [Swianiewicz and
Łukomska, 2014] on a sample of 496 Polish municipalities. The cited authors were able to
find statistical evidence of the occurrence of local tax competition, especially in relation to
agricultural tax and real property tax. However, their studies show that it is rather a "yardstick
competition", used for building or maintaining political capital in which municipalities adjust
their tax rates to the rates adopted in the neighbouring municipalities16, so as not to lose
political capital, than "classical competition" for a tax base. In the authors' opinion, due to the
small range of local taxing power, these cases do not have a decisive impact on the revenue
potential of local government in Poland and on macroeconomic factors of development.
15
Considering the fact that the needs of local communities are largely determined by demographic conditions,
then the level of reference expenditures shall be determined on the basis of expenditure in territorial entities,
identified on the basis of characteristics/parameters of demographic structures of similar values. The reference
expenditure indicator is considered to be the highest level of spending per capita in these entities.
16
A similar mechanism for making decisions on the level of tax rates by local government decision-makers in
French regions is described by E. Reulier and Y. Rocaboy [Reulier and Rocaboy, 2009]. From observations of
asymmetric information between voters (taxpayers) and local government politicians, the authors ghypothesize
that voters, as a verification instrument of politicians, use mechanisms of comparing their fiscal situation with
the situation of taxpayers in neighbouring regions. The econometric studies conducted by the authors show that
such comparisons are more difficult in a situation when each neighbour has different rates and, consequently, a
situation of greater diversity in this regard is conducive to adopting higher rates by local government decisionmakers.
15
7. Summary and recommendations on how to broaden the scope of local tax
competition in Poland
Polish local finances require systemic changes involving the strengthening of fiscal
autonomy of local government. Local tax autonomy, and the greater freedom of local
government authorities in the scope of deciding on taxes associated with it, is a necessary
condition for the emergence of local tax competition and, consequently, more efficient use of
public funds in the sector of sub-national governments, increase of local tax base translating
to an increase in local government budget revenues, as well as a better match between the
supply of public goods and services to local preferences. Based on the previously presented
assumption that the specific sine qua non condition, necessary for competition to "function",
is suitable, real (and not symbolical) level of local financial autonomy, including its key
determinant – local taxing power, one should above all focus on the methods/possibilities of
broadening the scope of that power. In this context, it seems necessary to introduce certain
deregulation solutions and changes expanding the tax autonomy of local government entities
in Poland.
Firstly, one would need to consider the appropriateness of continuing to maintain a
monopoly of the state in regard to determining maximum local tax rates, and especially real
property tax. Consequently, it is the legislature, not the local government that decides on
unquestionable key structural elements of local government taxes, i.e. their rates. This
approach significantly reduces local taxing power, consequently translating into fewer
opportunities of local government in the context of its use of local taxes as an instrument of
effect on a varied environment and the size of its own revenues. It also introduces an
unjustified, somehow mandatory unification of local tax policies (for example, identical
maximum real property tax rate oblige both local government authorities constituting large
cities, as well as small towns). A legitimate question arises whether the decisions on tax rates
should be the exclusive domain of bodies constituting local government and which result from
the individual, diverse conditions of socio-economic development, and the situation on local
real estate markets in these units?
Secondly, it seems necessary to make complex changes in the Polish tax system in the
context of the distribution of tax revenues between the different levels of local government. In
the current legal status, neither poviats nor voivodeships have local taxes and, consequently,
these entities have been completely deprived of the opportunity to use the instrument of local
taxing power. One should consider the possibility of equipping these entities with particular
tax sources.
Thirdly, the scope of local tax autonomy in Poland may also be extended as a result of
certain institutional changes relating to the strengthening of the capacities of local tax
authorities. As previously mentioned, the only part of local government taxes is implemented
by municipal tax bodies, while its significant part for completely unjustified reasons, remains
the responsibility of the state tax bodies. This should be changed, because it is difficult to find
any arguments for taxes going in full to the municipal budget to remain the responsibility of
the central fiscal administration.
Fourthly, strengthening of local taxing power requires a thorough reform of the property tax
system in Poland. It seems essential to eliminate the anachronistic and areal tax system, and
replace it with a new cadastral system. Despite the fact that such a concept appeared in Poland
already in the first half of the nineties, it has not yet been achieved. The main argument
against the reform is that it would be a difficult solution to implement for political reasons.
Fifthly, an important instrument for increasing the scope of the tax decision-making of
local government authorities, thus expanding the scope of local taxing power in Poland could
be the introduction of the separation of part of the tax base for personal income tax (PIT) and
transfer it to the "possession" to local government entities. This would mean implementing
16
the postulate for replacing the currently binding shares of local government in PIT tax –
which is by the way deprived of the component of local taxing power – with a so-called
municipal PIT, in which this component exists. Such a solution will not only broaden the
scope of local tax instruments in Poland, but also enable to more closely connect taxes with
local public goods and services provided by municipalities.
Sixthly, the systems of fiscal levelling in the Polish system of local finances should be
verified, which are based on the mechanism of making solidarity payments by local
government entities with a high tax revenue for entities of a lower revenue. "Bad balancing"
of these mechanisms in Poland weakens the motivation of local government authorities to
work towards increasing the efficiency of fiscal sources of budget revenues located within the
territory remaining within their tax jurisdiction. Consequently, such a system not only reduces
local tax autonomy, but also the tendency for local tax competition.
The last, seventh postulate is perceived in Poland as very controversial. It concerns the
increase of the scope of local taxing power in the form of introducing shares of local
government entities in the goods and services tax (VAT)17. The Polish Ministry of Finance is
officially of the opinion that due to the specific structure of this tax (its multiphase character,
deductibility, zero taxing rate, the problem of returns, etc.) it is impossible to directly
determine the share of local government entities in revenues derived from this on the territory
of the given local government entity [Odpowiedź, 2014]. However, it should be noted, that in
some countries such a solution was successfully introduced (examples: Spain, Germany) and
in this context it is a proposal for consideration.
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